In Diduck, the plaintiff signed a distribution agreement with a master distributor, thereby becoming the exclusive distributor for certain products in a particular sales territory. The distribution agreement required the plaintiff to attend training, aggressively market the sales territory and operate the business in accordance with directives issued from time to time by the master distributor. The plaintiff paid an up-front fee to acquire the distribution rights of approximately $25,000.

The plaintiff became dissatisfied with the relationship and purported to rescind the distribution agreement under the Franchises Act, claiming that in substance it was a “franchise agreement”.

Under the first element of the definition of “franchise,” a franchisee must be required “by contract or otherwise to make a payment or continuing payments (whether direct or indirect) or a commitment to make that payment or those payments to the franchisor … in the course of operating the business or as a condition of acquiring the franchise or commencing operations”.

The Court found that this element was satisfied. First, the franchisee was required to make an up-front payment as noted above. Second, the franchisee was required on an annual basis to purchase $2,400 worth of inventory or to make a payment of $2,400.

The second element of the definition of “franchise” was met, since the franchisee was granted the right to sell or distribute goods that were substantially associated with the franchisor’s, or the franchisor’s associate’s, trademark, trade name, logo or advertising.

It was in relation to the third element of the definition that the Court focused. Under this element, the franchisor must exercise significant control over, or offer significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing strategies or training. Moreover, unlike in Ontario’s legislation, the Manitoba statute required that the significant control or assistance take place “under a business plan”.

The Court found that the third element had not been met, agreeing with the following submissions of the manufacturer:

[The manufacturer] argued that the distributor agreement does not meet the definition of a “franchise” … [as] the franchisor must offer “significant assistance in, the franchisee’s method of operation under a business plan (emphasis added)” and there was no business plan requested or provided in this case. Moreover, it argued that the training and manual it provided simply do not amount to significant assistance as contemplated by the definition under the Act … [as the] Manual provides information, tips and suggestions only. [The plaintiff] was provided with, and permitted to use, the [manufacturer’s] logo and marketing materials. He was free to choose any name for his company [other than the trade-marked name] and his website … He was given no direction or guidance on how to organize his business.

Since the “control and assistance” was limited to training and a manual that provided “information and advice” only, and there was no “business plan” as required by the Franchises Act, the distribution agreement was not a “franchise agreement”. Moreover, there was no evidence that “directives” (which the distribution agreement contemplated) had ever been issued to the plaintiff.

This is an example of a Court declining to find a distribution arrangement to be a franchise where evidence of significant control or assistance was lacking.

By Adam Ship

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McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation services, tax law, real property law, labour and employment law nationally and globally.McCarthy publishes a series of blogs to share information with companies to help them comply and manage their businesses. On the Inside Internal Controls blog we will share some of those blog posts sharing their expertise among others, in the areas of Competition/Anti-trust, Corporate and Commercial Law, Intellectual Property, Privacy, Environmental Law, Technology and Litigation. Read more here